Chartered Banker Institute Qualifications Sustainable and Green Finance Flashcards

24 sample cards from the Sustainable and Green Finance deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. State the four core components of the ICMA Green Bond Principles.

   1. Use of Proceeds; 2. Process for Project Evaluation and Selection; 3. Management of Proceeds; 4. Reporting. (These are supported by recommendations on external review and a green bond framework.)

2. Compare green bonds, social bonds and sustainability bonds by their use of proceeds.

   Green bonds finance environmental/green projects (e.g. renewable energy). Social bonds finance projects with positive social outcomes (e.g. affordable housing, access to healthcare), often targeting defined populations. Sustainability bonds finance a mix of both green and social projects. All three are 'use of proceeds' instruments under ICMA principles.

3. How does a sustainability-linked bond (SLB) differ from a green/social/sustainability bond?

   Green/social/sustainability bonds are use-of-proceeds instruments (money ring-fenced for eligible projects). A sustainability-linked bond is general-purpose: proceeds are unrestricted, but the bond's financial/structural characteristics (e.g. coupon step-up) change if the issuer fails to meet predefined sustainability performance targets. SLBs follow ICMA's Sustainability-Linked Bond Principles.

4. What does an 'external review' or 'Second Party Opinion' (SPO) provide for a green bond?

   An external review is independent assurance that a bond aligns with the relevant principles. A Second Party Opinion (SPO) is an assessment by an external provider of the issuer's framework and its environmental credentials/alignment with the Green Bond Principles. Other review types include verification, certification (e.g. Climate Bonds Standard) and green ratings/scoring.

5. Give examples of sustainable retail banking propositions a bank might offer customers.

   Examples include: green mortgages (preferential rates for energy-efficient/EPC-rated homes), green/retrofit home improvement loans, green car/EV loans, green savings accounts and green deposits, carbon-footprint tracking in apps, ESG/sustainable investment funds, and ethical credit cards. They steer everyday retail finance toward lower-carbon and socially positive choices.

6. What is a 'green mortgage' and on what is the preferential rate typically based?

   A green mortgage offers preferential terms (e.g. lower interest rate or cashback) for purchasing or improving an energy-efficient property. Eligibility is typically based on the property's Energy Performance Certificate (EPC) rating - commonly EPC A or B - reflecting lower energy costs and potentially lower default and collateral risk.

7. Distinguish a compliance (mandatory) carbon market from a voluntary carbon market.

   A compliance market is created and regulated by law - emitters must hold allowances to cover emissions (e.g. the UK ETS and EU ETS cap-and-trade schemes). A voluntary carbon market lets companies and individuals buy carbon credits/offsets voluntarily (not legally required) to offset emissions, often to meet self-set net-zero or carbon-neutral claims.

8. How does a 'cap-and-trade' emissions trading scheme work?

   A regulator sets an overall cap on total emissions and issues a limited number of tradable allowances (each typically equal to one tonne of CO2e). Emitters must surrender allowances equal to their emissions. The cap declines over time. Firms that cut emissions can sell surplus allowances; those that exceed must buy more - creating a market price for carbon and a financial incentive to decarbonise.

9. What is a 'carbon offset' (carbon credit) and what is the difference between avoidance and removal credits?

   A carbon offset/credit represents one tonne of CO2e reduced, avoided or removed elsewhere, used to compensate for emissions produced. Avoidance/reduction credits prevent emissions that would otherwise occur (e.g. avoided deforestation, renewable energy). Removal credits actively take CO2 out of the atmosphere (e.g. afforestation, direct air capture, soil carbon).

10. Define the 'mitigation hierarchy' (e.g. avoid-reduce-substitute-offset) for corporate emissions.

    The mitigation hierarchy prioritises actions in order: first avoid and reduce emissions at source, then substitute with lower-carbon alternatives, and only offset the residual emissions that cannot yet be eliminated. Offsetting should be a last resort for unavoidable emissions, not a substitute for direct decarbonisation.

11. Define the GHG Protocol Scope 1, Scope 2 and Scope 3 emissions.

    Scope 1: direct emissions from sources owned or controlled by the organisation (e.g. company vehicles, on-site combustion). Scope 2: indirect emissions from purchased energy (electricity, heat, steam, cooling). Scope 3: all other indirect emissions in the value chain, both upstream and downstream (e.g. purchased goods, business travel, use of sold products - and, for banks, financed emissions).

12. What are 'financed emissions' and which Scope 3 category do they fall under for a bank?

    Financed emissions are the greenhouse gas emissions attributable to a financial institution's lending and investment activities - the emissions of the companies and projects it finances. For banks they typically constitute the dominant part of Scope 3 emissions, falling under GHG Protocol Scope 3 Category 15 (Investments). They are usually far larger than a bank's own operational (Scope 1 and 2) emissions.

13. What is the PCAF standard and what is the core 'attribution' concept it uses for financed emissions?

    PCAF (the Partnership for Carbon Accounting Financials) provides the Global GHG Accounting and Reporting Standard for the financial industry. Its core concept is attribution: a financier is assigned a share of a borrower's/investee's emissions proportional to its financing relative to the company's total value, using an attribution factor.

14. State the PCAF attribution factor formula for financed emissions of a listed company.

    Financed emissions are calculated as the borrower/investee's emissions multiplied by an attribution factor: $$\text{Financed emissions} = \sum_i \left( \frac{\text{Outstanding amount}_i}{\text{EVIC}_i} \times \text{Emissions}_i \right)$$ where EVIC is the Enterprise Value Including Cash. The ratio of outstanding amount to EVIC is the attribution factor representing the financier's share.

15. What is the PCAF 'data quality score' and what is its range and direction?

    PCAF assigns a data quality score from 1 to 5 to financed-emissions estimates, reflecting the reliability of the underlying data. Score 1 represents the highest quality (verified, reported emissions data) and score 5 the lowest quality (estimates based on economic activity/asset class proxies). Lower scores indicate better data.

16. What is 'carbon intensity' and give an example metric used to compare portfolio emissions.

    Carbon intensity expresses emissions per unit of activity or value, allowing comparison across firms/portfolios of different sizes. Examples: emissions per unit of revenue (e.g. $\text{tCO}_2\text{e}$ per million of revenue), the Weighted Average Carbon Intensity (WACI), or physical intensity such as $\text{tCO}_2\text{e}$ per MWh of electricity generated.

17. What is the ISSB, and what are its first two standards IFRS S1 and IFRS S2?

    The International Sustainability Standards Board (ISSB), established by the IFRS Foundation in 2021, sets a global baseline for sustainability disclosure. IFRS S1 covers general sustainability-related financial disclosures; IFRS S2 covers climate-related disclosures and builds on/incorporates the TCFD recommendations.

18. What are the UK's 'Sustainability Disclosure Requirements' (SDR) and what is the UK government's approach to global standards?

    The SDR is the UK's integrated framework for sustainability-related disclosures and investment labelling, overseen by the FCA. It includes the anti-greenwashing rule, investment labels, consumer-facing disclosures, and naming/marketing rules. The UK government is developing UK Sustainability Reporting Standards (SRS) based on the ISSB's IFRS S1 and S2.

19. Contrast the EU's CSRD with the EU Taxonomy in terms of purpose.

    The Corporate Sustainability Reporting Directive (CSRD) is a disclosure regime requiring companies to report sustainability information under European Sustainability Reporting Standards (ESRS) on a double-materiality basis. The EU Taxonomy is a classification system defining which economic activities count as environmentally sustainable. CSRD = what/how to report; Taxonomy = what qualifies as 'green'.

20. What is a green/sustainable taxonomy, and what are the EU Taxonomy's six environmental objectives?

    A taxonomy is a classification system that defines criteria for economic activities to be considered environmentally sustainable, helping prevent greenwashing. The EU Taxonomy's six environmental objectives are: 1. Climate change mitigation; 2. Climate change adaptation; 3. Sustainable use/protection of water and marine resources; 4. Transition to a circular economy; 5. Pollution prevention and control; 6. Protection/restoration of biodiversity and ecosystems.

21. Under the EU Taxonomy, what three tests must an activity pass to be classed as environmentally sustainable?

    To qualify, an activity must: (1) make a substantial contribution to at least one of the six environmental objectives; (2) Do No Significant Harm (DNSH) to any of the other objectives; and (3) comply with minimum (social) safeguards (e.g. OECD Guidelines and UN Guiding Principles on Business and Human Rights).

22. What is the Climate Bonds Standard and its certification role?

    The Climate Bonds Standard is a labelling/certification scheme run by the Climate Bonds Initiative (CBI). It allows issuers to obtain certification that a green bond or loan meets science-based, sector-specific eligibility criteria consistent with the Paris Agreement, providing assurance to investors that proceeds genuinely finance low-carbon and climate-resilient assets.

23. What is the Chartered Banker Institute's Green Finance Certificate (GFC), and what is its broad scope?

    The Green Finance Certificate is a benchmark qualification from the Chartered Banker Institute that provides a foundational, sector-wide understanding of green and sustainable finance. Its scope covers climate change and the science, the role of the financial system and policy/regulatory drivers, green/sustainable products across banking, investment and insurance, risk management, and the knowledge needed to support the transition to a low-carbon, sustainable economy.

24. What is 'net zero' and how does it differ from 'carbon neutral'?

    Net zero means reducing greenhouse gas emissions as close to zero as possible and balancing any residual emissions with permanent removals, typically across all scopes and aligned to a science-based pathway (e.g. 1.5°C). Carbon neutral is a narrower claim usually achieved by offsetting (rather than deep reduction) a defined boundary of emissions, often only CO2 and frequently relying more heavily on purchased offsets.

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